BEPS seen clashing with domestic laws

Although India has signed the multilateral instrument (MLI) to curb tax evasion as a part of the Organisation for Economic Co-operation and Development (OECD), lawyers and tax experts see implementation hurdles. According to them, several provisions of the instrument are not maintainable under domestic laws. Further, even the implementation of the basic structure of MLI would need amendments to the current law.

Last month, Union Finance Minister Arun Jaitley signed the MLI along with 100 other countries in Paris. The basic idea of the instrument is to curb tax evasion by multinational companies (MNCs) that exploit the lacunae in the current tax treaties. To address the issue, the OECD had developed a framework called base erosion and profit sharing.

One of the important contentions is that the government is currently allowed to get into such tax arrangements with sovereign nations only. The OECD, with whom the MLI has been signed, is not a nation but an umbrella of nations. Legal experts say the government will have to make a constitutional amendment to Article 50 to accommodate the treaty.

There is also an issue with the proposed arbitration mechanism in the MLI. According to the instrument, any MNC can initiate arbitration proceedings in the country it is based in. Such arbitration is not permitted under domestic laws. Article (3) of the MLI defines a company which could be called a ‘transparent entity’. However, under the Income Tax Act there is no such categorisation, and experts say the Centre will not be able to bring such categorisation just for the sake of MLI, as it could be in conflict with India’s existing tax pacts with other countries.

“There are several hurdles to implement the MLI. The government is likely to limit the implementation to only those provisions which are maintainable under domestic law. But this will weather down the arrangement significantly,” said a source.

From an industry perspective, there are concerns about the interplay between the MLI and general anti-avoidance rule (GAAR). GAAR overrides other tax treaties. The MLI would override any domestic law or tax arrangement in case of conflict.